The future of solar, water and greentech: Talking with A-list VC guy Brian Hinman

On a recent trip down to Silicon Valley from San Francisco, I got a chance to sit down for an extended discussion with Brian Hinman. He is one of a growing number of A-list venture capitalists who have jumped the fence from IT into alternative energy and greentech ventures. Oak Investment Partners is one of the most venerable venture capital firms in the country, and Hinman is the firm's point man on greentech. He's the kind of guy that you have to listen to based on his track record -- co-founder of a two successful companies and a former CEO of a third. Hinman founded Picturetel, which was later acquired by telecom equipment company PolyCom (PLCM). Hinman then founded 2Wire, another telecom equipment company that ended up with revenues greater than $300 million.

So this is a guy with no Internet fluff in his pillow. Hinman is a hard-core engineer with 12 patents to his name. Hinman also loves to talk ideas about greentech innovations and sits on the boards of seven different Oak greentech portfolio companies. He has a fairly encyclopedic knowledge of the industry. Our talk ranged widely, so I've edited heavily. Here are some brief excerpts from our conversation:
DailyFinance: Tell me a little bit about your strategies in greentech investing.Brian Hinman: To get the kind of huge returns you need for venture investing, it has to be a technology driving the next innovations in a field. So we've steered away from anything that looks like project financing or people doing plays on money. Across the portfolio, we have 11 companies. We have invested $274 million and are among the top five investors in terms of deals and total capital committed. Oak primarily invests in later-stage companies, so I am the high-beta guy around the office.

You have invested in a number of solar startups. Tell me about one of them and what you were looking for.
We are invested in GreenVolts, a high-efficiency concentrated photovoltaic company that is really innovative. Over 95% of the product is made from glass or aluminum and so it's very environmentally friendly and easy to recycle. We looked at companies producing various types of thin-film photovoltaics and decided the valuations were too rich for us. In the solar space, everyone looks at First Solar (FSLR), which has been the real home run, and the joke is, "What's going to be the Second Solar?" I think there will be other extraordinarily successful companies in solar and there is lots of room to succeed.

How did First Solar end up being the market leader in thin-film solar cells?
To me, the recipe seems to be two-fold. First Solar focused on manufacturing process technology to drive the cost curves down on the back end. They really became among the best in solar panel manufacturing. Then, on the front-end, they focused on where to sell their photovoltaics and get the best bang for their buck. And that's Spain or Germany, where you had big government subsidies driving very large utility-scale installations and buyers. First Solar has been really pragmatic as business guys.

I am curious, though. There are many types of solar power products on the horizon that promise to be far-more efficient than what First Solar, SunPower and other solar panel makers are building right now.
There is not going to be any one right answer. Different technologies have different attributes that make them uniquely suited to different marketing issues. We didn't do anything in thin-film solar cell makers because the valuations were so high. We had missed those inflection points. Then we looked more broadly at where we could be playing in the solar space. In terms of PV technologies, those possibilities scan a spectrum from very low-efficiency but cheap concentrated solar plays using standard Fresnel lenses up through the high-efficiency triple-junction cells and high-concentration photovoltaics. For us, it was looking at each of those areas and trying it figure out which ones would be the best valuation.

We decided to focus on concentrated photovoltaics. We liked it because it was still very early in the game and valuations were not as high. As a system product, if we could get high-volume contract manufacturers into the business we could come down dramatically on cost per watt. We will see efficiencies for photovoltaic cells from the high 30 percent to the mid-40 percent range, which is much higher than standard silicon-based photovoltaic cells. We thought that you put those two together and that should translate into a significant market. And you could be paid a premium for the higher energy-density outputs in places where available land may be finite and where other factors, such as feed-in tariffs, might mean a higher dollar-per-watt for you as compared to energy production that did not use alternative technologies.

How developed is the high-concentration photovoltaic market?
It's very embryonic, even through there are a dozen players right now. Some manufacturers are finally starting to get some volume and are starting to see cell costs come to a point where it gets interesting. With regard to the triple-junction cells that are generally required for HCPV, there used to be only two players making them. That kept costs up. We are talking to four other new players seeking to make triple-junction solar cells. Having more suppliers will help.
What are the key newer developments you see in HCPV?
Well, one key development is silicone-on-glass technologies. Historically, HCPV relied on mirrors or acrylic Fresnel lenses to concentrate sunlight. The acrylic lenses are attached to silicon photovoltaic cells. The majority of current designs rely on these acrylic lenses. But there are problems with acrylic. It absorbs heat and will expand with that heat. For this reason, at some point it would start to loosen a little bit and allow water intrusion into the system. Aging is also an issue. Acrylic skylights -- made out of Plexiglas -- look really beat up after 10 years. That's the same as these acrylic solar concentration systems. But if you go to a junkyard and look at a destroyed car, you will notice the glass windshield looks almost as good as the day it came out of the factory, if the glass is intact. The news silicone-on-glass technology is not only affordable but also reliable for long term installations of high concentration photovoltaic cells. That could change the game on high-concentration solar systems and make them much more reliable over the longer term.

Tell me about some of your other greentech investments.
We are doing a variety of different stuff. We have companies in solar, biofuels, batteries, automotive components and we have a water desalination company. It's one of those areas where you have to make a significant improvement to have an impact. Our company, NanoH20, is a good example. It's completely an energy play. On average, it costs $4 to produce 1000 gallons of desalinated water. Of that, almost half the cost is energy consumption. So you have the salt water blowing by but only half is turning into potable water. Energy costs represent almost $2 of the total. The NanoH20 guys are commercializing a breakthrough that came out of UCLA that makes it possible to produce twice as much water per unit of power as compared to traditional desalination system. If they are able to take the costs down to $3 per kilogallon, then you have a compelling case for an investment. And you can start to think about a desolation business in many places in world where people can't afford to do desalination now. It's a major cost improvement that will open a lot of other countries to desalination.